UBS flags buyback possibility after US$1.23b Q2 profit beats forecast

Zurich

UBS, the world's largest wealth manager, on Tuesday signalled the possibility of resuming share buybacks later this year after generating more income than expected in the first six months and as it boosted capital during the coronavirus pandemic.

Second-quarter earnings of US$1.23 billion overshot expectations thanks to much stronger than expected performance from its investment bank, and solid profit in its core wealth management division, helping to temper a pandemic-induced slump in its Swiss retail and corporate banking business.

Its capital position came in at the upper limit of its 12.7 per cent to 13.3 per cent CET1 capital ratio target, as the bank recorded fewer than anticipated drawdowns and as operating profit helped it buoy core capital.

Long-time chief executive Sergio Ermotti, who is due to leave the bank in November, said that the capital set the bank up well to pay the second half of its 2019 dividend - pushed back due to the Covid-19 pandemic - later this year and to consider resuming share buybacks in the fourth quarter.

Shares opened 2.1 per cent higher as analysts pointed to strong capital and revenue, as well as manageable expectations for credit losses, before rising to as much as 4 per cent in mid-morning Zurich trading. The stock is down about 2.5 per cent this year.

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Europe's first major lender to report second-quarter results, the bank's focus on wealth management with smaller global investment banking and Swiss retail and corporate banking operations has helped place it on a more resilient footing during the Covid-19 pandemic than many European peers.

But a 2 per cent fall in second-quarter operating income, including US$272 million in expectations for credit losses, fell short of the exuberant results posted by trading powerhouses in the United States, which benefitted more squarely from a spike in market activity.

In the first quarter, trading activity among UBS's wealthy clients had more than offset the risk of increased defaults, helping the bank to a 40 per cent net profit rise.

While trading levels remained high in the second quarter, a drop in asset valuations during a market rout in March - which set the bank up for lower recurring fees, particularly with its US wealth management clients - saw the bank's core wealth management division post more modest growth from April through June.

Assets at the bank's global wealth division climbed 11 per cent in the quarter to stand at close to US$2.6 trillion, driven by the market rally.

Its investment banking division grew pre-tax profit by 43 per cent during the quarter, as trading more than offset a slowdown in its advisory business.

Revenue from foreign exchange, rates and credit trading surged 118 per cent to US$847 million, although the market unit's larger equities unit stuttered, with income slipping 9 per cent to US$974 million.

UBS joins lenders including European rival Deutsche Bank in predicting that provisions to cover souring credit are peaking. It has also predicted, along with Wall Street firms, that the volatile market conditions that boosted trading revenue in the first half probably won't endure.

Swiss rival Julius Baer Group on Monday also signalled that it is preparing to restart its dividend payments after reporting a record first-half profit, though it still remains to be seen whether European regulators outside Switzerland will give the green light for banks to resume payouts.

BNP Paribas is leading a charge by French lenders lobbying to resume payments as they seek to shore up slumping share prices because of the coronavirus, people familiar with the matter said last month.

Mr Ermotti has scaled down trading after the financial crisis, though the bank still has a sizeable equities business.

While many lenders, particularly in Europe, have reduced their trading operations after the financial crisis, the pandemic has shown the benefits of maintaining such a business, which can provide a hedge during times of crises and make money while other parts of the bank suffer from loan defaults. REUTERS, BLOOMBERG